Climate risk management: The case of forecasting tropical cyclones

• Main Authors: CHANG, Carolyn W, CHANG, SK Jack, LIM, Kian Guan
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2010
• Subjects: Tropical cyclones; Climate risk management; Forecasting; Doubly-binomial Tree; Stochastic intensity arrival; Random time steps; Option pricing; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/5226; https://ink.library.smu.edu.sg/context/lkcsb_research/article/6225/viewcontent/SSRN_id1570625.pdf
• Institution: Singapore Management University

Global warming has induced an increasing number of deadly tropical cyclones with a continuing trend. Developing high-functional climate risk management tools in forecasting, catastrophe modeling, pricing and hedging is thus crucial. By using transactional price changes of traded hurricane derivatives as the predictor in a doubly-binomial pricing framework, we develop a dynamic market-consensus hurricane forecasting model. Our model can forecast when and how a hurricane will make landfall, and how these forecasts will update themselves upon trading arrival.